The GST is finally here. Here’s making head and tail of the Constitution (122nd) Amendment Bill.

Arindam Mukherjee August 05, 2016 00:00 ISTGimme Some Truth About The GST

outlookindia.com

2016-08-05T22:02:00+0530

Some say it’s the best thing since Azadi, others insist this is the biggest reform since, well, reforms began in 1991. There’s such hype around GST, now that it’s finally happening, people are trying to digest its (potential) impact. Will it raise GDP by over 1 per cent, as some have predicted? Is there a risk of higher inflation? What will be the political implications? What happens to ­taxes­ we had got so used to—excise, VAT, surcharges, cesses and that eloquently worded ‘entry tax’? And finally, why is Tamil Nadu holding out like the last of the Mohicans? To find out all this and more, read our primer.

What Really Is GST?

Fifteen is a significant number for this tax. Fifteen years ago, P. Chidambaram introduced the idea. Fifteen central and state taxes will get subsumed in GST. This will include cesses like Swacch Bharat and VAT (which is often termed GST lite). All we’ll be left with is one combined tax consumers will pay on products and services. This brings us to 15 per cent, the ideal rate for GST (the government hasn’t announced it yet, so estimates vary between 15-18 per cent, or even more for the base rate for GST). GST is an indirect tax—all other indirect taxes will be subsumed into it. Thanks to technology and in-built credits, GST will avoid double taxation. That said, indirect taxes are not supposed to be efficient, as they don’t discriminate between the rich and the poor. Many countries (140 of them) have moved towards GST, but tax gurus will tell you that direct taxes, like income tax, are more efficient, because they tax you on the basis of the amount of money you make. India still has to inc­rease the base of people who pay direct tax, but finds it easier to target a wide mass by an indirect tax like the GST.

Should Consumers Be Smiling?

Depends. At 15 per cent, GST is not bad. But assuming that it’s at 18 per cent or, god forbid, even more, consumers will lose out. Expect a big impact on services, currently taxed at 14 per cent. This will also result in higher inflation as prices will increase across the board. “At 18 per cent, it will be potentially inflationary. But eventually, GST will lead to a lower rate of inflation,” says Ajit Ranade, group economist at the AV Birla Group. It is assumed that once the system gets going, tax credits for value addition will reduce prices across the board. That’s the theory, but one can also assume it to be part of the sales pitch to sell the new tax. Many things are expected to get costlier for consumers. Agriculture expert Devinder Sharma explains why: “Inflation will go up in the long run as well because of price increase, but it will never come back to its original level.” While food will remain out of the purview of GST, many feel that there will be a cascading effect on food, which will make it costlier. There will be a domino effect of increase in transportation and freight rates that will increase food prices.

What’s The Deal For Modi Sarkar?

The central government will have a direct control over taxes under a GST regime. It is also a political victory for PM Modi as this was one of the most contentious issues in Centre-state rel­ations. The Centre had struggled to get both states and political parties on the same page. GST will get implemented from April 2017 and a full implementation would be visible only after a year. That would be close to India’s next general election. How it fares is a big gamble for Modi considering that in the 140 countries GST has been imposed, it has not delivered according to expectations, but for bringing in big gains for industry. Will India go the same way?

Where Does That Leave The States?

In many ways, it is a blow to federalism—the control of states over various state taxes imposed till date will go once the single GST rate will set in. The only way states will gain is by administering the state GST on which they will have control. They will also lose the power to ­attract investment in the state by dangling tax rebates and holidays as a single rate will prevail. Yet, many states that have not been able to attract investment because of their unfavourable tax regimes will now gain, thanks to a single rate regime. States like Tamil Nadu, which have a strong industrial presence, have so far chosen to stay out of GST to retain its control over state taxes. But eventually even Tamil Nadu may have to join in once GST assumes a nationwide stature.

What About Business?

As usual, business is the big gainer—GST will rid them of the plethora of central and state taxes they have to suffer now. A uniform GST coupled with an input tax credit system will bring in gains for them and res­ult in lower prices. The gains will be visible in cement, consumer durables, FMCG, telecom hardware, auto and auto-ancillary industries. Whether they pass on the benefits to the consumer is another matter?

Finally, Every Tax Has Its ­Exemptions. Why GST?

At this point, alcohol and petroleum have been kept out of the purview of GST. This is primarily because in both cases, the exc­ise duty at the central and state level is pretty high and states as well as the Centre make a significant amount of revenue from these two industries and would not like to let go of this cash cow. About 47 per cent of revenue for states comes from pet­roleum. But eventually there is a roadmap to bring petroleum into the GST net. That would benefit consumers.

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How Indian Consumers Will Be Impacted Assuming Goods & Services Tax (GST) Is Set At 18%

Current Tax Rate

7-30% Consumer DurablesWith a drop in taxes, consumers will gain as prices will fall. TV, fridge etc to get cheaper.

14% ServicesAdvertising, air tickets ­ and all services will ­become more expensive